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Using Cfds for active investments management


Using Cfds for active investment management

Translating the aspirations and goals of diverse households into appropriate investment decisions is a daunting task.

The basic framework involves dividing the investment process into two main investment approach: passive and active.

On the back of passive process: Buy & Hold, the investor decides to buy an asset for a certain time horizon and then to maintain the position up to the horizon target, without modifying the position but eventually to increase it.

Using an active approach, on the other hand, the investor can reduce the risk exposure, particularly the price volatility impact on  the position, periodically modifying the asset allocation by using specific financial instruments.

CFDs (contracts for difference) allow the investor to carry out the active management purpose, having also the potential to profit from a falling market price trend.
The investor, using CFDs, can go long and/or short the underlying stock or equity index, transforming a passive portfolio management into an active one.

Financial theory supports the idea that active portfolio management, on the back of risk monitoring and of investment position adjustment, tends to perform better than a passive strategy, after a certain period of time (basically above 18 months horizon).


The basic of CFDs

CFDs investment involves only a small % of investor’s liquidity because of trading on margins (*), so using CFDs the investor can invest less than the amount of the deal.
Using CFDs the investor can buy or sell the CFDs underlying: the stock or the equity index correlated to the CFD price.

The investor can trade UK, US and European shares, equity indexes and equity sector on the back of the correlation between CFDs price and the underlying price.

Remind that you can trade also CFDs on currencies and commodities.

If you are a UK investor, using CFDs you can take also the advantage to be exempt from the stamp duty.

(*) Purchasing stocks or CFDs on margin means the investor borrow part of the purchase price of the stock or CFD from a broker. The margin account is the portion of the purchase price contributed by the investor; the remainder is borrowed by the broker.

If the margin is 10% of the purchase amount, it means that the investor using just 10% of its liquidity could participate to the investment for 100% of the purchase amount, or that the broker is financing 90% of the deal.

In this case the participation rate is 1:10 or 10 times the initial margin.

 

Examples of active management using CFDs:

 

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